Gold prices will sink, but just enough to shake off its skeptics

Gold prices are up 33 percent this year, and it may be worth more than $2,000 by the end of the year. But gold prices will likely fall, at least for a little while.

Yuriko Nakao / Reuters / File

Gold bars are displayed during a photo opportunity at the Ginza Tanaka store in Tokyo, in this file picture. Gold has risen a substantial amount in value this year, but it may have gotten ahead of itself.

Here’s your north star…your compass….your GPS to the future. Print it out. Paste it to your refrigerator.

About the turn of the century, two markets turned
Gold turned up
Stocks turned down
These major trends will end Whence they meet

There you have it. Two markets diverged in a lonely wood. And that has made all the difference! Stocks went up 332 points on the Dow yesterday. But so what? It’s just a bounce. Noise. Or misinformation put out by Mr. Market, intended to trap unwary investors.

Our view is that the bear market began in January 2000. The feds fought it off with two huge extravaganzas of spending — the first beginning in 2001…the other after 2008.

Stimulus does wonders for stock prices…but it no longer works for the economy that sustains them. For every dollar that the Fed has put to work to fight the crisis since 2008, for example, it has produced only 80 cents worth of GDP. It didn’t work.

Fighting a credit contraction with more credit is a losing proposition. Eventually, investors are bound to realize that stocks are headed down. Eventually the bear market will resume. And eventually it will come to an end.

Our guess is that it will end when the Dow and the price of gold arrive at the same point — probably around $3,000. Whatever the number, you’ll be able to buy the entire group of Dow stocks for the price of one ounce of gold.

Of course, our view is a minority one. Warren Buffett doesn’t buy it. Most investors don’t buy it. We don’t even suggest that you buy it, dear reader. Just remember it. If it turns out as expected, we want to be able to say ‘We told you so.’

And if it doesn’t work out? Please have the grace to forget we mentioned it.

We would like to be able to predict the future, but we’ve never gotten the hang of it. We’re just guessing.

But since we’re just guessing, we don’t see why we should hold back.

We’re also guessing that…

…the weight of so much debt is depressing growth…and will soon depress stock prices too…

…that the economy is becoming zombified from too much government money…especially the military…

…that Mr. Market is ready for a long bear market anyhow; he’s tanned, rested, and ready to go to work

…that the US is following in Japan’s footsteps…towards a long period of on-again, off-again recession

…that the recession of ’08-’09 in the US never actually ended…

…and that stocks will go down over the next 5-10 years until they finally hit a real bottom.

But wait. Here comes the San Francisco Fed. Can you believe it? It agrees with us. Bloomberg reports:

Aging baby boomers may hold down US stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.

Americans born between 1946 and 1964 are beginning to retire as the US stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.

The equity-price-to-earnings ratio of US stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu.

Overseas investors’ demand for US stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said.

“For many primary purchasers of US equities outside the US, their demographics are even worse than ours, in particular Europe and Japan, which have older age profiles prevailing than the US does,” Spiegel, vice president of the bank’s research department, said in a telephone interview today.

At the same time, foreign investors, including sovereign wealth funds, may decide to hold a larger share of US equities, Liu and Spiegel said. Also, emerging market countries such as China may ease capital controls, allowing their citizens to invest in US equities, they said.

Now, let’s look at the gold market. Gold prices went down $30 yesterday.

Is it too late to join the party?

Investors don’t know what to do. They were buying gold this week because the Fed is putting on its annual shindig at Jackson Hole, Wyoming. Everybody knows the Fed sees itself as a booster for Wall Street. They know, too, that QE2 came out of the Fed last summer. That program didn’t do anything for the economy…

…but what a gift to gold holders!

Gold is up 33% so far this year. And by the look of the chart…it could easily finish the year above $2,000. Maybe above $3,000.

But — remember we’re just guessing — gold looks like it has gotten ahead of itself. It looks over-bought. Besides, investors may be expecting too much of the Fed.

Of course, if the Fed comes out with some more high-octane market hooch…this party could really go wild. But, it isn’t likely. Everybody’s watching. Bernanke needs to give the markets enough juice so they don’t fall apart on Friday…but not enough so the gold market goes blind.

Most likely, he will encourage investors. But he won’t cause a panic. Not yet.

And most likely, gold will fall.

Look, we’re gold bugs here at The Daily Reckoning. We have more faith in gold than we do in the fellows running the world financial system. Not that they’re not nice men. And they’re plenty smart. It’s not that we think they’re stupid. It’s just that we think they’re human. They put on their pants one leg at a time, just like everybody else. And just like everybody else, if you put them under pressure…they’ll crack.

But not yet. Our views on the stock market were severely tested during the big rallies of the ’00s. Now, it is the gold bulls who face a test. Gold has gone up every year since 2000. It’s been too easy. So, it’s time for Mr. Market to pull a fast one on gold buyers.

The process of de-leveraging the private sector, following in Japan’s footsteps, will be long, slow and hard. The feds will fight de-leveraging. They’ll zombify the economy. They’ll make a bigger mess of things…

…but they won’t create conditions for the real Third Phase of the bull market in gold. Not yet.

Yes, dear reader, you pried it out of us. We were trying to be coy. We wanted to hold off. We thought that maybe if we gave it to you all at once, well…maybe you wouldn’t respect us.

But there…we’ve gone and done it anyway. You have our Big Prediction on gold right in front of you. And it didn’t cost you a penny.

We’re gold bugs. But we’re not always gold bulls. And our guess now is that Mr. Market is going to throw us a curve. (Bugs…bulls…curves…why the hell not?) Yep. He’s drawing in millions of Johnny-come-lately gold buyers into the market. And now he’s going to massacre them…and test us.

Because gold is going lower…not higher.

Yep, you read it here first. Stocks are going down. But so is gold.

“Bill, you’ve been saying that gold is going higher for 11 years. Are you now really saying that it’s probably going down?”

“Yep.”

“But didn’t you just urge readers to sell stocks and buy gold?”

“Yep.”

“So you now think it’s going down, right? “

“Yep.”

“So, are you selling your gold?”

“Nope… You think I’m crazy? This is just a temporary setback…maybe a few years, that’s all. This bull market in gold won’t end until gold and the Dow meet.”

Our guess is that gold goes down…shakes out the speculators and weak investors…and then — perhaps a couple years from now…perhaps longer — begins its third and final phase.